Capital flows and monetary control under a domestic currency substitution regime: the recent Brazilian experience

The 90s have witnessed a resumption in capital flows to Latin America. due to the conjugation of low interest rates in the US and economic reforms in most LA countries. In Brazil. however. substantial capital flows have becn induced by the extremely high domestic interest rates practiced by the Central Bank as a measure of last reson given the absence of successful stabilization policies. These very high interest rates were needed to prevent capital flight in a context of a surprisingly stable inflation rate above 20% a month. and keep interest bearing govemment securities preferable to foreign assets as money substitutes. We carefully describe how this domestic currency substitution regime (interest bearing govemment securities are substituted for MIas cash holdings) requires the Central Bank to renounce aoy control over monerary aggregates. In this domestic currency substitution regime. hyperinflation is the most likely outcome of an isolated (i.e.. without fiscal adjusanents) attempt by the Brazilian Central Bank to control money.

Judicial system performance and economic development

The role of judicial systems in determining economic perfonnance has gained increasingly attention in recent years. Nonetheless, the literature lacks a clearly articulated framework to examine how judicial systems influence the investment and production decisions of economic agents. This paper tries to till in this gap. It examines what constitutes a well-functioning judiciary, analyzes how dysfunctional judicial systems compromise economic growth, and reviews the relevant empirical literature. It concludes with some remarks about why, despite the widespread perception that well-functioning legal and judicial systems are key to the success of market-oriented reforms in developing and transition countries, judicial refonn has lagged so much behind other reforms.